The scandal that recently enveloped Wells Fargo teaches an important lesson about running an ethical business. And Wells Fargo was trying to run an ethical business, despite its huge blunder. For example, Well Fargo avoided many of the pitfalls and risky investments that plagued other big banks in 2008/2009.

Here is what happened. Several years ago Wells Fargo decided it was not doing enough cross-selling, Cross-selling means getting customers who use one service, such as checking, to use other services, such as savings or credit cards. There is nothing wrong with cross-selling – all banks do it. Wells Fargo developed a specific strategy to encourage cross-selling, which was to involve its employees in telling customers about other products and services.

In order to encourage employees to support the program, Wells Fargo employed the time honored strategy of providing incentives to employees who succeeded at cross-selling. This is where everything went wrong. Employees not only responded to these incentives by cross-selling, they manufactured fake accounts in the names of existing Well Fargo customers. Some customers figured this out, but many didn’t and ended up paying fees on accounts they didn’t even know they had. The problem was huge. In attempting to correct the problem the company fired 5,300 employees and lost its highly respected CEO, John Stumpf.

Well Fargo made a number of mistakes including not publicly acknowledging the problem soon enough and not having adequate controls to detect the fake accounts. But what is unique about this problem is that so many employees were involved in the wrong doing. Unlike many corporate crises, this was not one or two rogue executives in an otherwise healthy organization. This was plain wrong-doing on a massive scale.

The Wells Fargo mess teaches a clear lesson which is that you get what you pay for. Specifically, you can talk yourself blue in the face about ethics, as many Wells Fargo managers did, but you can not send employees a clearer signal than their paycheck.

The first reason this is important is that when organizations think about creating an ethical culture, they almost always ignore the organization’s reward system. They print codes of conduct, mandate training and establish ethics hotlines. But if you are rewarding the wrong things, you will get the wrong behaviors. This is as true of the clerk at your local branch bank as it is of the top levels of an investment bank. Organizations signal what they really care about through their reward systems. Remember that the one corporate document every employee reads is their paycheck.

The importance of this lesson goes well beyond ethics. An army of management consultants is advising businesses that they can get more out of their employees if they adopt one or another reward strategy instead of pay for performance. The idea is that you can get better performance out of employees if you abandon pay for performance in favor of one or another strategy that rewards “the whole person” and not just the paycheck. The peak of this phenomenon is called holocracy, a veritable tangle of cross cutting evaluations and peer-enforced group-think.

The Wells Fargo case shows once again the power of pay for performance. Unfortunately, it also showed the power of pay for performance when you pay for the wrong performance. The performance systems of most organizations are the jealously guarded hostages of fortress HR. Executives who want to run truly ethical – and effective – organizations need to tear down the walls of this fortress before engaging in silly talk about the greater good. You will have a lot better chance of avoiding the sort of ethics crisis that Wells Fargo has undergone if you take charge of your organization’s reward system. You cannot leave your organization’s greatest source of influence on its employees in the hands of the organization’s bureaucracy.

Is there still a point to having in-person, flesh-and-blood meetings? Is there a point to such meetings when we can see and hear a person in another part of the country/world as if they were seated across from us? Is the belief that being there in-person still matters just a pre-technological bias that will pass as technology makes remote communication even more accessible? My work in ethics tells me that there is a point to in-person meetings – and we can put our finger on just what this point is. I explain this in the Huffington Post at http://www.huffingtonpost.com/mark-pastin/up-close-and-personal-why_b_9394572.html .

There is little use in being ethical if you are unable to influence the thoughts and actions of others. It is one thing to know right from wrong and quite another to act effectively on this knowledge. To put your ethics to work, you have to be able to influence others to do the right thing. Ethics is not a warm, fuzzy feeling that makes you feel good about yourself. It is a commitment to doing your best to make the right thing happen. When you are trying to convince others to follow an ethical path, you cannot use the tools of trickery so often taught in courses on influence. You have to be both effective and ethical in how you get others to agree on an ethical course of action. Here are some powerful tools of ethical influence.

Act First.

Don’t wait for others to show they are committed to doing the right things to make your own commitment clear. One company to which I consult adopted a strict but much ignored policy prohibiting gifts from vendors. One day, the COO of the company received a package from a vendor that contained a gold plaited St. Andrew’s putter built specifically for him. He really wanted to keep it. But he handed it to his administrative assistant with instructions to return the putter to the vendor along with a note about the company’s gift policy. News of his action moved through the company like wildfire, and the gift policy was suddenly real.

Find Common Ground.

When you are trying to convince others to act ethically, appeal to their principles before appealing to your own. When you are trying to convince someone to take an ethical course of action, there is a natural tendency on the part of others to see you as trying to force your principles on them. But if you explain why you want to take the course of action in terms of their ethical principles, you start out from a position of respect “I know you believe in giving everyone a fair chance so can we agree …” There is often surprisingly little disagreement at the level of basic ethical principles, so reasoning from the principles of others is often fairly easy.

As many of you know first hand, there has been a running battle over the years between ethics/compliance and human resources. This battle often focuses on the hotline and the idea that most hotline calls are about HR issues. But there are also battles over training, investigations, background checks – you name it. If anyone is willing to share stories about this battle, it would be most welcome. You can comment here or contact me directly at councile@aol.com. Don’t worry I am not looking for anything to be attributed by name or organization – just some of the experiences of ethics and compliance professionals. What I write about this will eventually end up on this web site.

I have found two recent publications that may be of interest. The first is on ethics and business success and pretty much follows the discussion here. It can be read at http://tinyurl.com/q55rash. The second is on a new topic which is how to build ethics into a start-up. This one is by Martin Zwilling and can be read at http://tinyurl.com/nb6jdug. Enjoy and comments are always welcome.

In an ethics crisis, you need to know what happened, who did what and who knew about it. An investigation into an ethics crisis cannot follow the usual internal investigation protocol since those running the investigation may be implicated in the crisis or in covering it up. You need an independent investigation. Even if you conduct the investigation under legal privilege, anticipate that the investigation may become public and that you may eventually be required to share the investigation with regulatory or enforcement authorities.

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While there will continue to be new posts on longer topics on ethicswhisperer.com, I also encourage you to follow markpastin.com, which is updated more frequently and focuses on issues of the day. Of course, your comments are always welcome on any of our sites.

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